Unit: IV

FINAL ACCOUNTS OF SOLE TRADERS

Introduction :
A Trial Balance marks a definite stage in the preparation of accounts. It indicates that all
the transaction for a particular period has been duly entered, posted and balanced. But this it self
is not the end of book-keeping work. Its a means to an end, the end being a. to find out the profit
or loss made by the business firm in given period and b. to understand the financial position of
the business as on a given date. A business man can ascertain these by preparing the final
accounts, which is prepared on the basis of the trial balance. The Preparation of final accounts is
the last step in the accounting circle. The final account includes manufacturing account, trading
accounts, profit and loss account and balance sheet. Even though the balance sheet is a statement,
for all practical purposes, it is treated as part of final accounts. We are concerned with trading
and profit and loss account and balance sheet and the same are discussed in this chapter.
Trading Account :
Trading account is prepared mainly to know the profitability of goods bought or
manufacture and sold by the business man. The difference between the selling price and cost
price of the goods is the gross result. The term ‘Goods’ means the goods bought for resale. It
does not include assets. If sale proceeds are more than the cost of goods sold, gross profit is
made. If sale proceeds are less than the cost of the goods sold, gross loss is incurred.
Format:
Trading Account for the year ended on 31st December
Dr. Rs. Cr. Rs.
To Opening Stock By Sales less Return
To Purchases less Returns By Closing Stock
To Wages
To Freight Charges
To Dock Charges
To Excise Duty
To Octroi
To Import duty
To Fuel, Power etc.
To Store Consumed --
To Royalty Production Basis.
To Manufacturing expenses
To Gross Profit
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Manufacturing Account :
A business man purchases finished goods for resale where as a manufacturer buys raw
materials, converts them in to finished goods, by incurring certain expenses, and then sells them.
Thus, Trading Account is spitted into two-Manufacturing Account and Trading Account.
Manufacturing account is the account to show the cost of manufacture or production. On the
debit side, opening stock of raw materials, work-in-process, purchase of raw materials, carriage,
manufacturing expenses and all other expenses relating to factory are entered. On the credit side,
closing stock of raw materials, work-in-process, are shown and the balance, representing the cost
of production of finished goods, is transferred to Trading Account. If one wants to know the cost
of manufacturing, then as Manufacturing Account-
will have to be prepared.
Profit and Loss Account :
By preparing the Trading Account, its possible to find out the Gross Profit or Gross Loss
made during the given period. The next step is the preparation of the Profit and Loss Account to
ascertain net profit earned or net lost suffered during a given period of time. The balance of
Trading Account is brought down to Profit and Loss Account. Then, the Profit and Loss Account
is credited with other incomes and debited with all indirect expenses. Then the Profit and Loss
Account may be balance and the balance is Net Profit or Not Loss. to be transferred to capital
account, in case of sole trader or partnership firms.
Profit and Loss Account for the year ended 31st December
Dr. Rs. Cr. Rs.
To Gross Loss By Gross Profit
To Management expenses By Interest Received
Office Salaries By Discount Received
Rent of Office Building By Commission
Office Lighting By Income from Investment
Office, Rent and Taxes By Apprenticeship Premium
Printing and Stationery By Rent from tenants
Telephone Charges By Reserve for Disc. on Creditors
Postage By Interest on Renewal of Bills
Legal Expenses By Miscellaneous income
Audit Fees By Net Loss
Insurance -
General expenses etc.
To Selling expenses :
Salesman Salaries
Traveling expenses
Advertising
Bad Debts
Selling Commission
Brokerage
Free Samples
To Distribution expenses :
Carriage out
Warehouse Rent
Warehouse Insurance -
Delivery Van expenses
Packing expenses
To Depreciation :
Depreciation of Assets
Maintenance expenses
To Finance expenses :
Discount Allowed
Interest on Loan -
Interest on Capital
Discount on Bills
Loss by Fire
To Net Profit
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Balance Sheet:
A Balance Sheet is a statement of the financial position at a given date. The given date is
the date at which the final accounts are prepaid. Transactions are first recorded in journal. Entries
in the journal are posted to ledgers. Ledger accounts are balanced and the balances are recorded
in a Trial Balance. Trial Balance consists of all Accounts – Personal, Real and Nominal. From
the Trial Balance, nominal accounts are transferred to Trading or Profit and Loss Account and
the remaining balances are taken to Balance Sheet. However, Balance Sheet is a summary of
whole of the accounting record. This is because the nominal accounts are transferred to Revenue
Accounts, and Revenue account is closed by shifting the balance to the Balance Sheet. Balance
Sheet is also known as a Statement of Assets and Liabilities. Balance sheet is the last and the
most important link in the chain of Final Accounts and Statements. It describes the financial
position of a business in a systematic standard form. It is a mirror of a business. When the assets
exceed the liabilities, one can conclude that the business is sound and solvent. The function of
the Balance Sheet is to show the picture of the business on a particular date.
Balance Sheet as on
Liabilities Rs. Assets
Rs.
Current liabilities Liquid assets
Bills Payable Cash in Hand
Sundry Creditors Cash at Bank
Bank Overdraft Cash in Transit
Long Term Liabilities Floating Assets
Loan from Bank Sundry Debtors
Fixed Liabilities Deposits Investments
Bills Receivable
Stock in Trade
Capital Prepaid expenses
Fixed Assets
Plant and Machinery
Buildings
Furniture & Fixtures
Land
Fictitious Assets
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Miscellaneous expenses
 Profit & Loss
Intangible Assets
Goodwill
Patents
Patterns
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Adjustments :
Following are the Adjustments that are to be considered while preparing final accounts.
Each and every adjustment is to be posted in two places. The following is the summary of those
two places for each adjustment.
1. Closing Stock.
i. Trading Account Credit Side, show as an item.
ii. Balance Sheet Assets Side, show as an item.
2. Depreciation
i. Balance Sheet Assets Side, deduct from particular asset.
ii. Profit and Loss Account debit side, show as an item.
3. Outstanding Expenses
i. Profit and Loss Account Debit side, add with particular expense.
ii. Balance Sheet Liabilities side show as an item.
4. Prepaid Expenses
i. Profit and Loss Account Debit side, deduct from particular expense.
ii. Balance Sheet Assets side, show as an item.
5. Accrued Income or Outstanding Income
i. Profit and Loss Account Credit side, add with particular income.
ii. Balance Sheet Assets side, show as an item.
6. Income Received in Advance
i. Profit and Loss Account Credit side, deduct from particular income.
ii. Balance Sheet Liabilities side, show as an item.
7. Interest on Capital
i. Balance Sheet Liabilities side, add with capital.
ii. Profit and Loss Account Debit side, show as an item.
8. Interest on Drawings
i. Balance Sheet Liabilities Side, deduct from capital.
ii. Profit and Loss Account Credit side, show as an item.
9. Interest on Loan
i. Balance Sheet Liabilities side, add with Loan.
ii. Profit and Loss Account Debit side, show as an item.
10. Interest on Investment
i. Balance Sheet Assets Side.
ii. Profit and Loss Account Credit side, show as an item.
11.Bad Debts
i. Balance Sheet Assets side, deduct from sundry debtors.
ii. Profit and Loss Account Debit side, show as an item.
12. Provision for Bad debts
i. Balance Sheet Assets side, deduct from sundry debtors.
ii. Profit and Loss Account Debit side, show as an item.
13. Provision for Discount on debtors
i. Balance Sheet Assets side, deduct from sundry debtors.
ii. Profit and Loss Account Debit side, show as an item.
14. Provision for discount on creditors
i. Balance Sheet Liabilities side, deduct from sundry creditors.
ii. Profit and Loss Account Credit side, show as an item.
15. Drawings of Goods by proprietor
i. Balance Sheet Liabilities side, deduct from capital.
ii. Trading Account Credit side, show as an item.
16. Free Samples to customers
i. Trading Account Credit side, show as an item.
ii. Profit and Loss Account Debit side, show as an item.
17. Loss of Stock
i. Trading Account Credit side, show as an item.
ii. Profit and Loss Account Debit side, show as an item.
18. Manager Commission
i. Profit and Loss Account Debit side, show as an item.
ii. Balance Sheet Liabilities side show as an item.
Note : While calculating manager commission on Net Profit or Gross Profit due
consideration is to be given whether it is based on Profit before charging such
commission or after charging such commission
Preparation of Trading Account
1. Prepare Trading Account of Miss. Archana for the year ending 31.12.2007 from the following
information :
Opening Stock 80,000
Purchases 8,60,000
Freight Inward 52,000
Wages 24,000
Sales 14,40,000
Purchase Returns 10,000
Sales Returns 3,16,000
Closing Stock 1,00,000
Import duty 30,000
Preparation of Manufacturing Account
2. The following are the balances in the Ledger of Miss. Bharathi for the year ended 31 st March
2007.
Opening Stock :
Raw Materials 20,000
Work-in progress 3,000
Finished goods 10,800
Purchase of raw materials 50,000
Sales 2,40,000
Fuel and coal 1000
Wages 32,000
Factory expenses 40,000
 Office expenses 30,000
Depreciation on Plant Machinery 3,000
Closing Stock :
Raw Materials 20,000
Work-in-Progress 4,000
Finished goods 8,000
Prepare manufacturing Account for the year ended 31 st March 2007.

1. The following are the balances in the Ledger of Miss. Chitra for the year ended 31st March
2007
Stock on 01.01.2007
Raw Materials 10,000
Work-in-process 5,000
Finished goods 20,000
Stock on 31.12.2007
Raw Materials 5,000
Work-in-process 15,000
Finished goods 30,000
Purchase of Raw Materials 50,000
Direct Wages 10,000
Carriage Charges on purchase of raw materials 5,000
Factory Power 5,000
Depreciation on Factory Machines 5,000
Purchase of Finished Goods. 30,000
Cartage paid on Finished Goods purchased 2,000
Preparation of Profit and Loss Account
2. From the following balance extracted at the close of the year ended 31 st Dec. 2007, prepare
Profit and Loss account of Miss. Devi as at that date.
Gross profit 55,000 Repairs 500
Carriage on sales 500 Telephone expenses 520
Office Rent 500 Interest Dr.. 480
General Expenses 900 Fire Insurance Premium 900
Discount to customers 360 Bad Debts 2,100
Interest from Bank 200 Apprentice Premium Cr.. 1,500
Traveling expenses 700 Printing & Stationery 2,500
Salaries 900 Trade expenses 300
Commission 300

1. From the following balances, taken from the Trial Balance of Miss. Ilakkiya, prepare a
Trading and Profit and Loss Account for the year ending 31 st Dec. 2007.
Dr. Cr.
Stock on 01.01.2007 2,000
Purchases and Sales 20,000 30,000
Returns 2,000 1,000
Carriage 1,000
 Carriage 1,000
Rent 1,000
Interest received 2,000
Salaries 2,000
General Expenses 1,000
Discount 500
Insurance 500
The Closing Stock on 31 st December, 2007 is Rs. 5,000.
Preparation of Balance Sheet
2. Prepare Balance Sheet of Miss. Farzana as at 31 st December 2007.
Capital 10,00,000
Closing Stock 2,00,000
Fixed Assets 3,10,000
Sundry Debtors 10,00,000
Profit & Loss Account 2,10,000
Sundry Creditors 3,75,000
Liabilities for Expenses 55,000
Drawings 30,000
Cash and bank 1,00,000

Preparation of Final Accounts with single Adjustment

1. From the following balances extracted from the books of Miss Gomathi. Prepare a Trading
and Profit and Loss Account and a Balance Sheet.
Opening Stock 1,250 Plant and Machinery 6,230
Sales 11,800 Returns Outwards 1,380
Depreciation 667 Cash in hand 895
Commission Cr.. 211 Salaries 750
Insurance 380 Debtors 1,905
Carriage Inwards 300 Discount Dr.. 328
Furniture 670 Bills Receivable 2,730
Printing Charges 481 Wages 1,589
Carriage Outwards 200 Returns Inwards 1,659
Capital 9,228 Bank overdraft 4,000
Creditors 1,780 Purchases 8,679
Bills Payable 541 Petty Cash in hand 47
Bad Debts 180
The Value of Stock on 31 st December, 2007 was Rs. 3,700.
Preparation of Final Accounts with several Adjustments
2. From the following Trial Balance and additional information for Miss. Hema, you are required
to prepare a Profit & Loss Accounts for the year ended 31 December 2007.
Particulars Dr. Rs. Cr. Rs.
Capital 20,000
Sundry Debtors 5,400
Drawings 1,800
Machinery 7,000
 Sundry Creditors 2,800
Wages 10,000
Purchases 19,000
Opening Stock 4,000
Bank Balance 3,000
Carriage Charges 300
Salaries 400
Rent and Taxes 900
Sales 29,000
Total 51,800 51,800

Additional Information : Closing Stock Rs. 1,200. Outstanding Rent and Taxes Rs. 100.
Charge depreciation on machinery at 10%. Wages prepaid Rs. 400.
1. The following are the Balances extracted from the Books of Miss. Indhu as on December
31,2007.
Capital 2,00,000 Loan @9% 50,000
Drawings 35,000 Salaries 44,000
Buildings 1,00,000 Wages 75,000
Machinery 25,000 Rent 27,500
Furniture & fittings 6,000 Traveling expenses 12,500
Opening Stock 1,25,000 Postage telegrams 1,350
Cycle 4,000 Rates& taxes 900
Purchase 7,50,000 Carriage inwards 25,000
Sales 12,50,000 Carriage outwards 7,500
Sales returns 50,000 Interest paid 3,750
Duty paid on purchase 1,50,000 General charges 9,000
Sundry debtors 1,00,000 Carriage outwards 7,500
Sundry creditors 75,000 Interest paid 3,750
Reserve for Bad & doubtful debts 4,000 General charges 9,000
Reserve for Discount on Debtors 2,000 Bad debts 3,000
Cash in the bank 24,000 Cash in hand 2,500
Provide the following: outstanding Salary Rs.4,000; Rent Rs.2,500; Wages Rs.6,000 and
Interest outstanding. Maintain the reserve for doubtful debts at 5% and reserve for Discount on
Debtors at 2 ½ %. Provide depreciation for building 2 1/2 % Machinery 10% furniture 6% cycle
15%. Prepare final Accounts.

1. Prepare Trading and Profit and Loss a/c and Balance Sheet from the following particulars
Miss. Jaya as on 31-12-2007
Capital 10,000
Cash in hand 1,500
Bank O.D. @ 5% 2,000
Purchases and Sales 12,000 15,000
Returns 1,000 2,000
Establishment charges 2,500
Taxes Insurance 500
Bad debts reserve 1,000
 Bad Debts 500
Sundry Debtors and creditors 5000 1,850
Commission 650
Investments 4,000
Stock as on 1 st Jan, 1996 3,000
Drawings 1,500
Furniture 500
Bills Receivable and Payable 3,000 2,500
Total 35,000 35,000
Adjustments: Salary Rs.100 and Taxes Rs.400 are outstanding but Insurance Commission
amounting to Rs.100 has been received in advance. Interest accrued on investment Rs.210. Bad
Debts Reserve is to be maintained at Rs.1,000. Depreciation on furniture is to be charged at 10%.
Stock on 31 st Dec.1993 was valued at Rs.4,500.

1. From the following Trial Balance of Miss. Kalaivani as at 31 st December 2007. Prepare
Trading and Profit and Loss Account for the year ended 31 st Dec.2007 and a Balance Sheet as
on that date.
Particulars Dr. Rs. Cr Rs.
Capital 80,000
Drawings 6,000
Machinery 25,000
Stock 1-1-07 15,000
Purchases 82,000
Returns inwards 2,000
Sundry Debtors 20,600
Furniture 5,000
Freight and Duty 2,000
Carriage outwards 500
Rent, Rates & Taxes 4,600
Printing and Stationery 800
Trade Expenses 400
Sundry Creditors 10,000
Sales 1,20,000
Return outwards 1,000
Postage and Telegram 800
Provision for doubtful Debts 400
Discount 800
Rent Received 1200
Insurance Charges 700
Salaries and wages 21,300
Cash in hand 6,200
Cash at bank 20,500
2,13,400 2,13,400
Adjustments: Stock on 31.12.2007 was valued at Rs.14,600. Write off Rs.600 as bad
debts. Provision for doubtful debts to be made at 5% on debtors. Create a provision for discount
on debtors and on creditors at 2%. Depreciate machinery by 20% and furniture by 5%. Insurance
prepaid was Rs.100.

UNIT –IV
1. Prepare trading account of Archana for the year ending 31-12-1996 from the following
information:
Particulars RS
Opening stock 80,000
Purchase 8,60,000
Freight inward 52,000
Wages 24,000
Sales 14,40,000
Purchase returns 10,000
Sales returns 3,16,000
Closing stock 1,00,000
Import duty 30,000
SOLUTION:
Trading account of archana for the year ending 31-12-1996
Date Particulars Rs Rs Date Particulars Rs Rs
To opening 80,000 By sales 14,40,000
stock
To purchase 860000 Less:sales 3,16,000 11,24,000
returns
Less:purchase 10000 8,50,000 By closing 1,00,000
return stock
To freight 52,000
inward
To wages 24,000

To import duty 30,000

To gross profit 1,88,000
c/d
12,24,000 12,24,000

2.From the following balances extracted at the close of the year ended 31st dec 1996,prepare
profit and loss account of Mr.Raj as at the date:
Particulars RS
Gross profit 55,000
Carriage on sales 500
Office rent 500
General expenses 900
Discount to customers 360
Interest from bank 200
Travelling expenses 700
Saleries 900
Commission 300
Repairs 500
Telephone expenses 520
Interest(Dr.) 480
Fire insurance premium 900
Bad depts 2,100
Apprentice premium(Cr.) 1,500
Printing & stationery 2,500
Trade expenses 300
SOLUTION:
Profit and loss account of Mr.Raj for the year ending 31-12-1996
Date Particulars Rs Date Particulars Rs
31/12/96 To carriage on sales 500 31/12/96 By gross profit b/d 55,000
To office rent 500 By bank interest 200
To general expenses 900 By apprentice 1500
premium
To discount to customer 360
To travelling expenses 700
To salaries 900
To commission 300
To repairs 500
To telephone expenses 520
To interest paid 480
To fire insurance premium 900
To bad debts 2100
To printing &stationery 2500
To trade expenses 300
To net profit transferred to 45,240
capital a/c
56,700 56,700

3. Prepare trading account of a trader for the year ending 31stDecember 1996 from the following
data:
Particulars RS
Opening stock 50,000
Goods purchasing during 1996 2,80,000
Frieght and packing on the above 20,000
Closing stock (31-12-1996) 60,000
Sales 3,80,000
Packing expenses on sales for distribution 12,000
SOLUTION:
Trading account of a trader for the year ending 31st December 1996
Date Particulars Rs Date Particulars Rs
st
31 Opening stock 50,000 31st Sales 3,80,000
December December
1996 1996
Goods purchase during 2,80,000 Closing 60,000
1996 stock
Packing expenses 12,000
Gross profit 90,000
4,40,000 4,40,000

4. Prepare trading and profit and loss account from the information given below:

Opening stock - 3,600

Purchases - 18,260
Wages - 3,620
Closing Stock- 4,420
Sales -32,000
Carriage on Purchases- 500
Carriage on sales - 400
Rent(factory) - 400
Rent(office) - 500
Sales Returns- 700
Purchase returns- 900
General Expenses -900
Discount to Customers -360
Interest from Bank- 200
SOLUTION:
Trading Account
Date Particulars Rs Rs Date Particulars Rs Rs
To opening stock 3600 Sales 32000
To purchase 1826 (-) sales return 700 31300
0
Less : purchase return 900 17360 By closing 4420
stock
Direct expenses:
To wages 3620
To rent(wages) 400
To carriage on 500
purchase
To gross profit 10240
35720 35720

Profit and Loss A/C

 Date Particulars Rs Date Particulars Rs
To carriage on sales 400 By gross profit 10240
To rent office 500 By bank interest 200
To general expenses 900
To discount customer 360
To net profit 8280
1044 10440
0

4. The following are the ledger balance extracted from the books of Weifa:

Weifa capital 50000 Sales 301000

Bank overdraft 8400 Return inwards 5000
Furniture 5200 Discount (cr) 800
Business premises 40000 Taxes &premises 4000
Creditors 26000 General expenses 8000
Opening stock 26600 Salaries 18000
Debtors 36000 Commission allowed 4400
Rent from tenants 2000 Carriage on purchases 3600
Purchases 220000 Provision for doubtful 1600
Debts bad debts
written Off

Adjustments:
(i). Stock on hand on 31-12-1995 was estimated as rs.40,120
(ii). Write off depreciation business premises rs.600 and furniture rs.520
(iii). Make a provision of 5% on debtors for bad &doubtful debts
(iv). Allow interest on capital at 5% and carry forward rs.1400 for unexpired insurance
Prepare final account for the year ended 31-12-1995
Solution:
Book of Weifa
Trading and profit &loss account for the year ending 31-12-1995
particulars Rs Rs Particulars Rs Rs
To opening stock 44000 By sales 301000
To purchases 220000 Less:sales 5000 296000
return
To carriage on 3600 By closing 40120
purchases stock
To gross profit 68520
336120 336120
To taxes &insurance 4000 By gross profit 68520
Less:prepaid 1400 2600 By rent 2000
To general expenses 8000 By discount 800
To salaries 18000
To commision 4400
 To bad debts 1600
Less:new provision for 1800
doubtful debts
3400
Less:existing provision 1000 2400
to depriciation
To depreciation
On business premises 600
On furniture 520
To interest on capital 5000 2500
0*
5/100
To net profit transferred 32300
to capital A/c
71320 71320

Balance sheet of Weifa as at 31-12-1995

liabilities Rs Rs Assets Rs Rs
Creditors 26600 Debtors 36000
Bank overdraft 8400 Less:provision for B.D 1800 34200
Capital 50000 Stock 40120
Add:net profit 32300 Prepaid insurance 1400
Add:interest on capital 2500 84800 Furniture 5200
Less: 520 4680
depreciation
Business premises 40000
Less: depreciation 600 39400
119800 119800

5. Prepare trading,profit&loss a/c and balance sheet from the following trial balance of
Mr.madan:
Debit balances Rs Credit balances Rs
Sundry debtors 92000 Madan’s capital 70000
Plant& machinery 20000 Purchase returns 2600
Interest 430 Sales 250000
Rent,rates,taxes&insurance 5600 Sundry creditors 60000
Conveyance charges 1320 Bank overdraft 20000
Wages 7000
sales returns 5400
Purchases 150000
Opening stock 60000
Madan’s drawings 22000
Trade expenses 1350
Salaries 11200
Advertising 840
 Discount 600
Bad debts 800
Business premises 12000
Furniture&fixtures 10000
Cash in hand 2060

Adjustments:
(1) Stock on hand 31/12/96 Rs.90000
(2)Provide depreciation on premises at 2.5%; plant& machinery at7.5% and furniture&fixtures at
10%
(3) Write off Rs.800as further bad debts
(4) Provide for bad debts at 5% on sundry debtors
(5) Outstanding rent was Rs.500 and outstanding wages Rs.400
(6)Prepaid insurance Rs.300 an prepaidsalaries Rs.700
SOLUTION:
Trading and profit & loss a/c of Mr.madan for the year ending 31/12/96
Particulars Rs Rs Particulars Rs Rs

To opening stock 60000 By sales 250000

To purchase 150000 Less:sales 5400 244600
returns
Less:purchase returns 2600 147000 By closing stock 90000
To wages 7000
Add:outstanding 400 7400
To gross profit c/d 119800
334600 334600
To trade expenses 1350 By gross profit 119800
b/d
To salaries 11200
Less:prepaid 700 10500

To conveyance charges 1320

To advertising 840
To rent,rates,taxes & 5600
insurances
Add:rent outstanding 500
6100
Less:prepaid insurance 300 5800
To discounts 600
To interest 430
To bad debts 800
Add:additional bad debts 800
Add:new provision for bad 4560 6160
debts
To depreciation:
 premises 300
Plant&machinery 1500
Furniture&fixtures 1000 2800
To net profit transferred to 90000
capital A/c
119800 119800

Balance sheet of Mr.madan as at 31/12/96

Liabilities Rs Rs Assets Rs Rs
Sundry creditors 60000 Sundry debtors 92000
Bank overdraft 20000 Less:bad debtors 800
Outstanding: 91200
Rent 500 Less:provision for B.D 4560 86640
Add: wages 400 900 Cash in hand 2060
Capital 70000 stock 90000
Less:drawings 22000 Prepaid:insurances 300
48000 salaries 700 1000
Add: net profit 90000 138000 Plant & machinery 20000
Less:depreciation 1500 18500
Business premises 12000
Less:depreciation 300 11700
Furniture & fixtures 10000
Less:depreciation 1000 9000
218900 218900